Warehouses revolve around inventory, and one of the key pieces that can help you manage your business is knowing your beginning inventory. This article will explore the meaning of the term, why it's valuable, and how to calculate it.
Article Contents
What is Beginning Inventory?
Beginning inventory, also called opening inventory, is the total value of your inventory at the start of an accounting period. It represents all of the goods a business can sell to generate revenue. Ideally, beginning inventory will match with the ending inventory of a previous accounting period, but if it doesn't, that can also be a valuable piece of data.
You can use the beginning inventory formula to better understand the value of your inventory at the start of a new accounting period. Read below to learn more about why beginning inventory is useful and how to calculate it.
Why Track Beginning Inventory?
Any change to beginning inventory compared with the previous accounting period usually signals a shift in the business. For instance, decreasing beginning inventory could be a result of growing sales during the period, or it could be due to an issue in the inventory management process. On the other hand, increased beginning inventory could be due to a business ramping up stock before a busy period, or it could signal a downward trend in sales. Either way, it's important to know what's happening with your inventory.
Beginning inventory can also help you better understand sales and operational trends and make improvements to your business model based on the available data.
How to Calculate Beginning Inventory
To calculate beginning inventory, just follow the steps below.
First, determine the cost of goods sold (COGS) using your previous accounting period’s records.
Next, multiply your ending inventory balance with the production cost of each item. Do the same with any new inventory.
Add the ending inventory and cost of goods sold.
Once you have this information, subtract the amount of inventory purchased from your result.
In formula form:
Beginning Inventory = ([COGS + Ending Inventory] - Purchases)
Calculation Examples
1. Determine the cost of goods sold (COGS).
Example: Earrings cost $3 each to produce, and Ali's Earrings sold 500 candles during the year.
COGS = 600 x $2 = $1200 COGS = 500 x $3 = $1500
2. Use your accounting records to calculate your ending inventory balance and the amount of new inventory purchased or produced during the period.
Example: Ali's Earrings had 900 candles in stock at the end of the previous period, and produced a further 1000 earrings during the next year.
Ending inventory = 900 x $3 = $2700.
New inventory = 1000 x $3 = $3000
3. Add the ending inventory and cost of goods sold.
Example: $2700 + $1500 = $4200
4. To calculate beginning inventory, subtract the amount of inventory purchased from your result.
Example: $4200 - $3000 = $1200
Couldn’t Find What You Were Looking For?
Visit our Help Center to search for more documents!